An E&E Special Report

TRANSPORTATION:

Drought hurts shipping industry, raises prices

Drought in the Midwest has reduced water levels on the Mississippi and Ohio rivers, potentially costing the shipping industry hundreds of millions in lost profits, industry experts said this week.

A dwindling water supply has forced barges to cut back on cargo loads, meaning more trips and less revenue. It has also increased the likelihood of river blockages, an issue that squanders both private and public resources.

"The Mississippi and Ohio rivers are such critical arteries of the nation's transportation system -- they're carrying [agriculture] and petroleum," said Ann McCulloch, spokeswoman for American Waterways Operators, a national trade association. "If there's not a significant rainfall over the next few months, the drought conditions could worsen and the water levels could continue to fall."

Under favorable operating conditions, barges can hold about 2,200 tons. But when this summer's drought reduced water levels on the Mississippi and Ohio rivers, that cargo capacity dropped almost 30 percent. Photo courtesy of American Waterways Operators.

U.S. rivers transport more than 60 percent of the nation's grain exports and 22 percent of domestic petroleum and petroleum products, according to a report by the National Waterways Foundation. One common barge tow can carry the equivalent of 70 trucks and operates with lower carbon emissions than traditional highway shipping. But with drought conditions blanketing the United States, water travel isn't all that lucrative.

"The people that take the hit are barge lines," said Marty Hettel, senior manager for bulk sales at AEP River Operations. "We're the ones that aren't being as profitable."

With water levels south of Cairo, Ill., so shallow, barges must reduce the weight of their loads in order to keep their drafts from skimming the riverbed. Every 1-inch loss of water decreases the carrying capacity of a barge by 17 tons of cargo, according to a news release by American Waterways Operators. But, in most cases, the situation is more serious than just a 1-inch deficit, McCulloch said. A normal tow has 15 barges, so a 1-foot loss of draft will reduce capacity by about 3,000 tons.

Under good operating conditions, AEP's company barges can load about 2,200 tons of dry commodities each, Hettel said. Under current conditions, however, that cargo shipment is now just 1,600 tons per barge.

That's when barges are allowed on the river at all.

Bottlenecks to price spikes

Lower levels mean that areas open for use are shrinking, which bottlenecks traffic. That has forced AEP to reduce the number of barges on the river from 40 to 30. And it's not the only one.

"All the river transportation industries run the same route, so we're all facing the same conditions. We have no alternative route," Hettel said.

Such a large-scale reduction in shipping capacity could translate into narrow profits for companies and higher prices for the consumer, Hettel added.

Shipping prices are generally based on spot markets or contracts. About 60 percent of the 74 million tons of freight AEP moves is tied to agreements that were signed months before anyone forecast the drought and its effect on waterways. This means AEP is forced to work harder for less money -- reducing the value of the company.

On the other hand, spot market prices allow fares to oscillate based on supply and demand so carriers can raise the cost of their services to make up for any losses incurred. For example, the average southbound grain out of St. Louis has risen about $4 a ton on a spot market basis, from $8.75 to $12.75, Hettel said.

"That could be driving some of the high prices for shipping," said Decker Walker, a principal at Boston Consulting Group.

Though this may affect the market on a company-by-company basis, Walker said, it's unlikely to significantly influence stocks. But, he was quick to add, anything is possible.

"These are all interconnected, complex ecosystems," he said.

Money for dredging key

The reduction poses a problem for President Obama's 2010 National Export Initiative, which promises to double U.S. exports by 2014, said Rep. Charles Boustany (R-La.). Less commodities moving downriver means fewer international trades.

"It's hurting our ability to export as well as bring goods into the country," Boustany said.

There's no doubt that low water levels are bad for business -- especially when barges accidentally run aground.

Such miscalculations can cost an organization tens of thousands of dollars, accounting for extra expenditures in personnel, equipment and fuel. Furthermore, barges stuck on sandbars create river blockages that can last for days and require assistance from the Coast Guard and the Army Corps of Engineers, both of which are funded with taxpayer money.

Last weekend, a vessel owned by American Commercial Lines Inc. got caught on a sandbar near Greenville, Miss., shutting down the river for an entire day. The obstruction caused a 13-barge backup, slowing commerce while the Army Corps used dredgers to excavate sediment from the streambed, said Bob Anderson, a spokesman for the corps' Mississippi Valley Division.

Congress authorized about $120 million for dredging this year, he added, and the funds have proved vital. The corps is on the river around the clock, surveying problem areas and dredging, Anderson said. The workload is so extensive that the United States has had to contract out to private dredgers.

"Anytime you have to dredge because of a low river, there's a cost involved," Anderson said. "We dredge every low water season; it's just that this year the harbors needed additional dredging."

Not as bad as 1988, but pretty bad

But the problem is not nearly as bad as it was in 1988, when water levels dropped 16 feet below normal in some areas, AEP's Hettel said. The industry could deploy only 16 barges per towboat, loading each with just a fraction of its maximum tonnage, he added.

"These conditions we're in are approaching points that we saw back in 1988, which are not what we would call normal conditions," Hettel said.

When the drought hit in 1988, policymakers set plans in motion to prevent economic crises in the future. They installed dikes in the Mississippi River that have increased stability, aiding river travel during this summer's drought, Anderson said. The government also proposed action plans that outline necessary protocols for when waterways run low.

Despite such preparations, there's no real solution for victims of the drought. Companies must look to Mother Nature for any short-term fix.

"Really, there's nothing we can do rather than 'Do your rain dance,'" Hettel said.

And that doesn't bode well for the industry as a whole.

"If we continue in the drought conditions as they're predicting and the river continues to drop, we'll probably see more problems," Anderson said.